NCPA - National Center for Policy Analysis


June 13, 2005

Since the spike in gas prices began in 2002, consumers spend between $63 and $79 per month more on gas than they did three years ago. But the best course of action in solving the "crisis" may be simply to do nothing, say the National Review's Jerry Taylor and Peter Van Doren.

Demand is currently driving the oil market, but not from gas-guzzling American SUVs. China is the main culprit, having increased its oil consumption by 1.47 million barrels a day between 2002 and 2004. Furthermore, government can do little to fix the problem, say the authors:

  • Drilling in Arctic National Wildlife Refuge (ANWR) would increase world oil supply by 1.4 percent and reduce prices by 14 percent, but it would take at least a decade before such a project produced substantial oil quantities.
  • Oil producers are reluctant to spend billions of dollars on new capacity that will take years to come on-line, especially after the price collapse in 1986 that resulted from excess production.
  • Repealing gas taxes would lower the price of a gallon of gas, but the lower prices would translate into more demand; since gas supplies are fixed in the short run, retailers would increase prices to keep pumps from drying out.

The answer? Let the market take its course. Initially, consumers are slow to change their habits when oil prices surge. After all, it's costly to trade in one's car for a more fuel-efficient model or to move closer to work. In the long run, however, both producers and consumers will change their behavior if prices remain high: producers will have greater incentives to produce new supplies and alternative fuels, and consumers will conserve more.

Looking back, today's gas prices are still a bargain, say Taylor and Van Doren. In relation to per capita disposable income, they are 90 percent of what they were in 1972 and 58 percent of what they were in 1981.

Source: Jerry Taylor and Peter Van Doren, "What to Do About the Gas Crisis,?" National Review, vol. LVII, no. 8, May 9, 2005.


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